Gold is on the rise! Gold and gold stocks have suddenly experienced an increase in price after a surprise move from the Swiss National bank. The bank has announced that it will no longer be holding the franc at a fixed exchange rate with the euro, forcing investors in search of a safe haven. (A safe haven is an investment that is expected to retain its value or even increase its value in times of market turbulence. Safe havens are sought after by investors to limit their exposure to losses in the event of market downturns.) Victor Thianpiriya, ANZ bank’s commodity strategist has said, “Gold has been a clear beneficiary of the safe-haven move, and the market reaction overnight has further highlighted the breakdown in correlation between gold and the euro,”
Looking forward, investors will have their eyes on the European Central Bank (ECB) meeting this Thursday, due to the market expecting a large quantitative easing program to be announced.
What is Quantitative easing I hear you ask?
Quantitative easing is an unconventional form of monetary policy where a Central Bank creates new money electronically to buy financial assets, like government bonds. This process aims to directly increase private sector spending in the economy and return inflation to target. However, that could lead to further falls for the euro, enhancing gold’s appeal as a currency hedge.
If that was not enough for you, China is set to announce it’s 2014 GDP, and with China currently being the largest buyer for gold, an under performing GDP could cause some stir in gold demands.
But why do people invest in gold?
Historical data shows gold retaining its value through time of hyperinflation, deflation and when times are uncertain perhaps due market turbulence or geopolitical instability.
Most investors choose to allocate between 2 – 10% of their investment portfolio to gold, this allocation balances out the portfolio and acts as an insurance for your asset as gold moves independently of for example bonds and stocks and any other adverse side effect of inflation.